The Canadian dollar fell 0.51 of a cent to 96.45 cents US after data showed that housing starts came in at 193,637 units in September, up from 183,964 in August.

Meanwhile, Statistics Canada said the trade deficit expanded to $1.3 billion in August from $1.2 billion in July. The increase came as imports grew 2.1 per cent and exports rose 1.8 per cent in August.

New York markets added to sharp declines chalked up Monday, with the Dow Jones industrials racking up a second, straight triple-digit decline, down 159.71 points to 14,776.53. The Nasdaq was off 75.54 points at 3,694.83 and the S&P 500 index gave back 20.67 points to 1,655.45.

A partial shutdown of the U.S. government continues into its second week after lawmakers failed to agree on funding. Traders were increasingly worried that the two sides won't be able to come to a spending agreement before Oct. 17 when the government hits its debt ceiling and starts to run out of money to pay its bills.

Republicans have said they want changes to President Barack Obama's signature health-care law and spending cuts in exchange for reopening the government and raising the debt limit. The president has said he won't negotiate over both those issues.

Up until now, declines have been steady but there were some indications this may be changing.

Short-term U.S. Treasury bill yields surged to levels not seen since 2008, in the midst of the financial crisis as investors worry about what happens if the debt ceiling is hit.

Also, the CBOE Volatility Index has returned to the highs seen in December and June, rising to 20.45, up from around 16 a week ago.

Allan Small, senior adviser at DWM Securities, said the belief is that U.S. lawmakers will arrive at an agreement, but it probably won't come until the last minute since traders "canâ€™t even imagine them breaching the debt ceiling."

"But at the same time, there are many people out there that are saying I'm not going to buy today because the politicians in Washington are going to take it to the 11th hour and markets will probably fall further so maybe we can get even better pricing a week from now," he said.

Manitoba Telecom Services (TSX:MBT) was a major TSX decliner, down $2.74, or 8.47 per cent, to $29.62 after Ottawa rejected a deal that would have seen its Allstream business sold to Egyptian investment group Accelero Capital Holdings due to "unspecified national security concerns."

The gold sector led declines, down about 2.6 per cent while the December bullion contract slipped 50 cents to US$1,324.60 an ounce. Barrick Gold (TSX:ABX) faded 52 cents to C$18.28 while Goldcorp (TSX:G) lost 58 cents to $25.47.

The base metals group fell 2.26 per cent as December copper lost early gains and closed unchanged at US$3.29 a pound. Teck Resources (TSX:TCK.B) lost 77 cents to C$26.56 while First Quantum Minerals (TSX:FM) dropped 39 cents to C$17.55.

The energy component erased early gains to move down one per cent as the November crude contract on the New York Mercantile Exchange was up 46 cents to US$103.49 a barrel. Suncor Energy (TSX:SU) fell 77 cents to C$35.81.

Talisman Energy (TSX:TLM) (NYSE:TLM) lost early momentum to move down 26 cents to $12.98, a day after activist U.S. investor Carl Icahn disclosed he has bought more than 61.5 million shares of the energy giant for a 5.97 per cent stake. The dip followed a 4.8 per cent advance Monday.

"Icahn will move that stock a little bit but at the end of the day, to me, Talisman has been just non-existent, not really moving much over the last few years," Small said.

"He could be able to have an effect on what the company does and his name alone will possibly move the stock a little bit."

The consumer staples sector was the sole advancer.

Shares in food company Saputo (TSX:SAP) ran up $2.02 or 4.08 per cent to $51.50 after the Montreal-based company entered into a $378-million agreement to buy Warrnambool Cheese and Butter Factory Company Holdings Ltd., one of Australia's biggest milk processors.

After the close, resource giant Alcoa (NYSE:AA) posted earnings ex-items of 11 cents a share, far higher than the five cents that analysts expected and its shares ran up 2.9 per cent in after-hours trading. Alcoa also beat on revenue which came in at $5.77 billion, against estimates of $5.63 billion.

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